From dollars to yen: why markets face turbulence in February

Global markets are experiencing a period of deep volatility. The declines of recent days are not coincidental but are responses to two converging geopolitical and macroeconomic risk factors. Understanding the flow of dollars to yen and its implications is essential to anticipate upcoming movements.

Shutdown in the United States: the immediate risk factor

The first pressure comes from Washington. Budget negotiations face a critical deadline: if no agreement is reached before January 30th, part of the U.S. government will shut down. The probability of this happening is close to 78%, according to recent reports. Democrats have announced their intention to vote against the new funding package, complicating the chances of an agreement.

When the risk of a shutdown materializes, markets react predictably but severely: uncertainty increases, risk appetite drops sharply, and investors sell indiscriminately. It’s an automatic reflex that impacts all assets, from stocks to cryptocurrencies.

The weak yen trap: how carry trade works

Japan has maintained its currency (yen) weak for years as a competitiveness strategy. This created an opportunity for a mechanism known as “carry trade”: funds borrow yen at very low rates and convert them into dollars to invest in stocks and digital assets, taking advantage of higher rates in other markets.

As long as the yen remains weak, this cycle functions. But when the risk of yen appreciation arises, everything changes. Funds are forced to close positions and repay loans, which involves massive asset sales. The result: rapid and deep corrections across multiple markets simultaneously.

Possible Fed intervention: dollar flows to yen at risk

Signs of coordinated intervention are becoming clearer. The Japanese Prime Minister has publicly warned about measures against “abnormal” yen movements. Market operators report that the New York Fed has contacted major banks regarding the yen, a step that often precedes coordinated interventions.

What would intervention entail? The U.S. would sell dollars and buy yen, strengthening the Japanese currency. However, before this happens officially, the market anticipates it: the yen begins to rise, carry trade funds close positions hastily, sell stocks and cryptocurrencies, and the market spirals downward.

This scenario of dollar flows into yen represents a reversal of years of trend, creating a seismic impact across all markets.

Extreme volatility on the horizon: key catalysts ahead

In addition to these structural pressures, the trade war between Trump, Europe, and Canada adds more uncertainty. What amplifies the risk is that this week brings key economic catalysts: Fed interest rate decisions, consumer confidence data, quarterly results from Microsoft, Meta, Tesla, and Apple, as well as PPI inflation reports.

Each of these events has the potential to accelerate ongoing movements. The convergence of political, monetary, and corporate risks creates an environment where extreme volatility is not the exception but the norm.